Favourable global liquidity conditions encouraged foreign investors to buy more than $7 billion of Indian equities so far in 2012, pushing up the index by more than 14 percent.

"With the backing of FIIs, retail participation increased in mid- and small-caps, which pushed them higher," said R. K. Gupta, managing editor at Taurus Mutual Fund. "However, the outlook for these shares is likely to be cautious going ahead."

Mid- and small-cap shares accounted for more than a third of the assets of diversified funds at the end of January, and holdings of such stocks rose to the highest level since January 2011, Morningstar India data showed.

Exposure to the financial services sector -- the top sector bet for money managers, with an allocation of over 20 percent -- also helped equity diversified mutual funds as the Bombay Stock Exchange banking index rose 5.12 percent.

Shares of top-lender State Bank of India gained 9 percent, while HDFC Bank rose 5 percent on hopes the central bank will further reduce the cash reserve ratio for banks to help ease tight liquidity conditions.